UK: Recent Tax Changes To Buying And Selling UK Residential Property

Over the past few months a number of changes have been made to
the tax regime for buying and selling residential property in the
UK. This article summarises the latest position.

Non-residents Capital Gains Tax ("NRCGT") rules
(Finance Act 2015)

These rules took effect from 6 April 2015. Subject to certain
exemptions, all non-residents will be subject to UK CGT on gains
arising post 5 April 2015 on the disposal of UK residential
property. Broadly, the basic starting point is that residential
properties are rebased, for NRCGT purposes, to their market value
as at 5 April 2015.

The rates of tax that will apply are:

Companies: 20% (that are not exempt companies)

Individuals: 18% or 28% (depending on whether the individual is
a basic or higher rate tax payer)

Trustees and personal representatives: 28%

The main entities which are either exempt or can claim an
exemption are: charities; certain investment trusts and venture
capital trusts; registered pension schemes; diversely- held
companies; certain unit trusts and open-ended investment companies
(or "OEICs"); certain schemes which have or include
investors which are offshore funds, OEICs or authorised unit
trusts; and companies that deal with life assurance. Reliefs may
also be available, such as principal private residence relief for
individuals or indexation relief for non-resident companies.

The government also announced certain changes to the NRCGT rules
at the Autumn Statement 2015, including an amendment to prevent
double taxation in certain instances.

On 8 July 2015 the government announced a new measure which
restricts relief for finance costs on let residential properties.
It is being introduced gradually from 6 April 2017. The new rules
operate by requiring, in the first instance, that profits are
computed without regard to the relevant interest payments. A
separate relief, a "tax reduction", is then calculated by
reference to basic rate tax on an amount equal to the interest
payments, for which relief has now been denied.

"Finance Costs" include: mortgage interest, sums which
are equivalent to interest and the incidental costs of obtaining
finance by means of the loan, for example, the fees incurred when
taking out or repaying mortgages or loans. The current deduction
for higher rate tax relief on finance costs will be restricted in
the following way:

In the tax year for 2017 to 2018 the deduction from property
income (as was previously allowed) will be restricted to 75% of
finance costs, with the remaining 25% being available as a basic
rate reduction

In the tax year for 2018 to 2019 this will be reduced to 50% of
finance costs and 50% will be given as a basic rate reduction

In the tax year for 2019 to 2020 this will be reduced to 25% of
finance costs and 75% will be given as a basic rate reduction

In the tax year for 2020 to 2021 no deduction for higher rate
tax relief on finance costs will be available and all financing
costs incurred by a landlord will be given as a basic rate
reduction

The Government announced on 8 July 2015 that, from April 2017,
it intends to bring all UK residential property held directly or
indirectly by foreign domiciled persons into charge for Inheritance
Tax ("IHT") purposes, even when the property is owned
through an indirect structure such as an offshore company or
partnership. This could, therefore, result in foreign domiciled
persons being liable to pay a 40% tax liability in respect of the
market value of UK residential properties held (directly or
indirectly) by them on their death.

These changes are due to be included in the 2017 Finance Bill
and a consultation document will be published in due course. It is
anticipated that draft legislation will be included in the Finance
Bill 2017. Further announcements may be made in the 2016 Budget, on
16 March 2016.

The proposed new rates will be 3% above the current SDLT rates
and will apply to purchases of second homes, for example, buy to
let properties, from 1 April 2016. It is currently anticipated that
the higher rates will not apply to: purchases below GBP 40,000,
caravans, mobile homes, houseboats, or funds making significant
investment in residential property, although the test for what
constitutes a significant investment in residential property has
not yet been finalised.

It is proposed that the higher rates will apply to all contracts
entered into after 25 November 2015, where completion takes place
on or after 1 April 2016.

Under proposed transitional rules the higher rates will not
apply to contracts which were exchanged on or before 25 November
2015 but not completed until on or after 1 April 2016.

The Government is currently consulting on the policy detail,
including the way in which joint purchasers should be treated, the
impact on those who only temporarily own two properties, the scope
of any exemptions and compliance issues arising from the new
regime. Confirmation of the final design of the new rules will be
announced at the Budget on 16 March 2016.

It is well established that a landlord can oppose renewal of a business lease if he demonstrates settled intention to demolish, reconstruct or carry out substantial construction works to the premises or a substantial part ...

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